Ukraine Moves To Stabilize Financial System

Ukraine has secured a big loan from the IMF in order to stabilize its finances amid the global crisis. To qualify for the loan, parties in parliament agreed to set aside their differences and pass stabilization laws proposed by President Viktor Yushchenko. Thanks to this, Ukraine managed to stabilize its currency, the hryvnya (UAH). The government also persuaded the owners of two problem banks, Prominvestbank and Nadra, to sell them. Both may fall under Russian control.

As the global crisis erupted, the UAH plunged by over 20 percent against the U.S. dollar. Several Ukrainian banks that were heavily dependent on foreign loans faced default. Prominvestbank, the country’s sixth largest bank, had to turn for to the National Bank of Ukraine (NBU) for stabilization loans and to call in NBU managers (see EDM, October 8).

The government of Prime Minister Yulia Tymoshenko appealed to the IMF for assistance. In order to qualify for IMF financing, Ukraine’s parliament passed a package of stabilization measures on October 31. This was the first big piece of legislation since the summer, when the ruling coalition of Yushchenko and Tymoshenko broke apart. The package, drafted by Yushchenko, was approved by 243 deputies, who represented the parties of Yushchenko and Tymoshenko plus the small centrist Lytvyn Bloc, far more than the 226 votes needed.

The package provided for: the creation of a government stabilization fund to help companies repay foreign debts and invest in domestic projects; the possibility of nationalizing problem banks; attracting loans from international financial organizations; and dropping the government’s populist plan to increase minimum wages (Ukrainska Pravda, October 31).

On November 5 the IMF Executive Board approved a two-year $16.4-billion standby loan for Ukraine, the biggest loan ever taken out by the country. The IMF praised Yushchenko’s financial stabilization package. “The authorities’ program, supported by the two-year standby arrangement with the IMF, aims to restore financial and macroeconomic stability by adopting a flexible exchange rate regime with targeted intervention, a pre-emptive recapitalization of banks, and a prudent fiscal policy coupled with tighter monetary policy,” the IMF said (www.imf.org, November 5).

With the arrival of the loan, the NBU flooded the Ukrainian currency market with U.S. dollars for banks to buy and at the same time introduced tougher restrictions on currency trade. The UAH stopped falling immediately, freezing at around UAH5.8 to the dollar, down from UAH4.6 to the dollar some three months ago, but up from almost UAH7 several days earlier. Following the IMF move, the United States also indicated its readiness to help Ukraine. Ambassador William Taylor said that a group of financial experts would arrive shortly in Ukraine to help the local government tackle the crisis (Inter TV, November 7).

Yushchenko said that the IMF loan was needed to show that the NBU had the power to tackle a crisis. Parliamentary speaker Arseny Yatsenyuk, who briefly led the NBU in 2004, opined that the IMF funds were a guarantee of stability but they would not be spent. “I believe this credit will not be used,” he said. “This is a signal to the world and Ukraine that the NBU can intervene in the market at any moment and sell as many dollars as needed in order to stabilize the exchange rate” (Inter TV, October 31).

Prominvestbank’s stabilization was one of the IMF’s conditions, and the government promptly moved to rescue the bank. Yushchenko instructed the NBU and Tymoshenko to change its ownership or to nationalize it. Tymoshenko was apparently in favor of nationalization, but the NBU found the buyers. Slav AG, an Austrian-registered company controlled by the Klyuyev brothers, parliamentary deputies from the pro-Russian Party of Regions, acquired 68 percent of Prominvestbank shares from the Matvienko family for an undisclosed sum. The Klyuyevs pledged to invest UAH4.5 billion ($770 million) in the bank. They will also have to pay back a UAH5-billion ($862 million) stabilization loan that the NBU issued to Prominvestbank in early October (Kommersant-Ukraine, November 12).

The Klyuyevs do not have that much money so they will have to take out loans to recapitalize Prominvestbank. One of the brothers, Serhy Klyuyev, denied the rumors that the bank had been bought for a third party. He said several banks were ready to help Prominvestbank with loans (Delo, November 12). Ekonomicheskie Izvestia, a Kyiv-based business weekly, however, reported on November 12 that the Klyuyevs would re-sell Prominvestbank to Russia’s Sberbank.

Apart from the Klyuyevs, several Russian banks and Ukrainian businessman Dmytro Firtash were interested in Prominvestbank (Kommersant-Ukraine, November 12). Firtash eventually managed to buy another ailing financial institution, Nadra, which is Ukraine’s seventh largest bank, reportedly for $200 million. Nadra faced difficulties in repaying $230 million in foreign debts, and the NBU persuaded its owners to sell the bank (Kommersant-Ukraine, November 10). Firtash is linked to Russia’s Gazprom. RosUkrEnergo, a joint venture set up by Gazprom and Firtash, was the monopoly supplier of Russian gas to Ukraine until recently.